Zinifex might get another offer

Oxiana/Zinifex. This deal has been mooted for some time and I’ve discussed the idea in this column before. What’s never been clear is who was going to take over whom and today we finally have the details. In theory, Oxiana is taking over Zinifex because Zinifex shareholders will receive Oxiana shares at a ratio of 3.1931 Oxiana shares for every Zinifex share. It’s being pitched as a merger of equals but the offer provides Zinifex shareholders with a 16% premium to Friday’s closing figures.

The company will be owned 50/50 by Oxiana and Zinifex and will have a new name. An interesting aspect of this takeover was the question of who would run the merged entity. You’ve got the chief executive of Oxiana, Owen Hegarty, a well-known leader from the mining sector, and you also have Andrew Michelmore of Zinifex, who used to be at WMC Resources. What has surprised me is that it’s been decided that Michelmore will be the chief executive of the combined group and Hegarty will become a non-executive director.

The combined entity will have a market cap of about $12 billion, which will make it the third-largest diversified mining company in Australia, roughly what BHP was worth just a few short years ago. So what we’re seeing here is just a continuation of what BHP is doing. And what Xstrata is doing. It’s a strategy of growth through acquisition. We’re seeing that rather than spending lots and lots of money to develop new projects, they have found it more cost effective to merge with other businesses. That’s why we are seeing small caps being taken over by the mid caps, and mid caps merging with other mid caps to become large caps. This deal reinforces the idea that there is one area of the market which is doing well and that area is resource companies.

It’s possible that someone else will now have a go at bidding for Zinifex. Of course, Zinifex is hostage to the zinc price because that’s mostly what it produces. But it’s got a lot of cash on its balance sheet – $2.5 billion – and it’s trading at a very low multiple of earnings. This merger will be implemented by a scheme of arrangement in May/June and should it fail there will be a break fee of $55 million. A lot of hedge funds will be looking to short Oxiana and buy Zinifex but there is a lot that’s up in the air. The thing is you could be short Oxiana but someone might decide to bid for Oxiana, which would produce an interesting situation. I think the board of Zinifex could have done a better job and they’ll have to sell this deal to their shareholders now. It’s still only early days and it won’t take place for at least four or five months so there’s plenty of time for other things to happen.

In the absence of a higher bid, it will probably be worth accepting. I think that the combined entity will attract more interest just because of its size and diversification. I don’t actually believe in mergers of equals; I prefer it when there’s a clear target and a clear aggressor because it’s clearer then what can happen and who might make a counter bid for whom. I don’t think Oxiana is going to pay more for Zinifex, but maybe it should. At the moment they’re indicating they will not, but it really just comes down to whether somebody else might have a crack at it. One of the things we’ve learnt about takeovers is that when one person bids for something, it’s suddenly time to move for anybody else who has thought about it.

Allegiance. Allegiance is the subject of a bid from Zinifex and importantly this isn’t affected by the Zinifex/Oxiana merger. Indeed, Allegiance management today welcomed the prospect of an Oxiana-Zinifex merger.

The Zinifex bid for Allegiance is $1.10 a share which had been increased from $1.05 a share. There were some unusual goings on last Friday, which led to Allegiance closing at $1.105. In the past I’ve said that this often happens as a bid nears completion, because someone might have over-accepted and needs to make up the amount of stock they don’t have. On Friday the stock actually traded as high as $1.11 but the volumes were quite significant. It’s not clear what exactly is going on but there is a small chance of another bid. This, after all, is a company that has been courting a counter-bid for some time, yet has failed to produce anything concrete.

Rio Tinto. What’s interesting here is that the premium at which Rio is trading has got very small against the BHP offer. At one stage last week it was only 0.3%. That is almost trading at par with the deal – 3.4 BHP shares for each Rio share. I think what that reflects is the fact that the deal is unlikely to be finished even by Christmas, because of all the regulatory requirements, so people are getting a bit uninterested in it. I think it’s a good trade to put on. We’ve been putting it back on again at those levels because you really are, for a very small price, buying the possibility that BHP increases its bid again – which I suspect it will – but only once it gets all the regulatory approvals through. I suspect that if the overall sharemarket continues to be volatile then a cash sweetener might be put on the table.

Herald Resources. I’ve mentioned before that I think that this is one of the more interesting situations in play. Last week it was revealed that a group called New Age World had acquired 5.1% of Herald for about $15 million, which is not a small amount of money. They bought the stake at between $2.60 and $2.65 and are yet to reveal their intentions. Now the current high bidder in this situation is Antam, which has a bid of $2.50 on the table, and the under-bidder is Bumi, which recently extended its bid of $2.25. So there are two firm bidders and a potential third party gunning for the company. It is trading at a premium of about $2.75, but that premium looks justified given the circumstances.

Consolidated Media. The current period of due diligence is coming to a close this week, but I anticipate that it will be extended. Notwithstanding any credit crunch-related issues I think this deal will go ahead. The two principals in this deal, Lachlan Murdoch and James Packer, know these assets pretty well. Indeed, Packer used to own them, so he would know them inside-out. The offer is slightly complicated, but the proposal roughly equates to $4.80 for each share. At the close on Friday it was trading at about a 9% discount to the bid. Now my opinion is that this deal will go ahead, and in the next couple of months. So given that it’s trading at a 9% discount and given that it’s likely to close out in a couple of months, this is a play that’s worth considering.

MFS. After a period of due diligence the City Pacific bid for MFS is off. Chief executive Phil Sullivan announced on Friday that after considering buying some of the group’s assets, it was decided that it would not be in the best interests of City Pacific’s shareholders to proceed. I think that for a lot of companies in the same boat as MFS and Allco, the chances of a white knight arriving on the scene are starting to look very slim.

Tom Elliott, a director of MM&E Capital, may have interests in any of the stocks mentioned.

nTakeover Action February 25-29, 2008
Date	Target	ASX	Bidder	(%)		Notes
28/02/08	Allegiance Mining NL	AGM	Zinifex	12.23
27/02/08	Auckland International Airport	AIA	CPP Investment Board (Canada Pension Plan)	10.33		Partial offer - for 39.53%.
28/02/08	Babcock & Brown Environmental Investments	BEI	Babcock & Brown	76.12
28/02/08	Findlay Securities	FDY	Zodiac Capital	13.41		Incl 7.29% held by Findlay Sec exec director.
12/02/08	Golden West Resources	GWR	Fairstar Resources	32.97		Extended to March 4.
04/02/08	Gosford Quarry	GQH	Guinness Peat	19.80
26/02/08	Herald Resources	HER	PT Bumi Resources	20.19		Recommendation withdrawn in favour of PT Antam offer.
30/01/08	Herald Resources	HER	PT Antam and Shenzhen	11.00		Recommended offer.
21/02/08	Jetset Travelworld	JET	Qantas	0.00		Potential 58%, subject to Jetset vote.
29/01/08	Mineral Securities	MXX	CopperCo	0.00		Subject to CopperCo meeting in late March.
28/02/08	QM Technologies	QMT	Computershare	6.85
28/02/08	Resource Pacific	RSP	Xstrata	83.98
06/02/08	Rio Tinto	RIO	BHP Billiton	0.00		Offer formalised.
28/02/08	Sydney Attractions Group	SAQ	Village Roadshow	97.66		Extended to February 14. Recommended.
27/02/08	Symbion Health	SYB	Primary Health Care	86.08
nScheme of Arrangement
23/01/08	Anzon Australia	AZA	Nexus Energy	53.10		Anzon Energy, with 53.1%, will vote in favour. Vote late April.
28/02/08	Emperor Mines	EMP	Intrepid Mines	78.70		Emperor shareholders approve scheme. Intrepid shareholders vote March 3.
13/02/07	Hostworks	HWG	Macquarie Communications	19.00		Shareholders approve scheme.
18/02/08	Macquarie Private Capital	MPG	Bear Stearns Private Equity	0.00		Vote late April/early May.
26/02/08	Mavuzi Resources	MAV	Mantra Resources	100.00		Court approves scheme.
nForeshadowed Offers
15/02/08	Allco Equity Partners	AEP	Regent Street Instalments	0.00		Possible conditional offer.
10/12/07	Atlas Group	AHS	Unnamed parties	0.00		Investigations advance, but no offer yet.
19/12/07	Beyond International	BYI	Destra Corp	0.00		Conducting due diligence.
05/11/07	Blue Energy	BUL	Sydney Gas	0.00		Discussions.
21/02/08	CBH Resources	CBH	Perilya	0.00		Talks on possible corporate transaction.
08/02/08	Chariot	CTI	TPG/SP Telemedia	70.60		Offer dependent on SPT Telemedia acquisition of TPG.
22/02/08	China Education	CEH	Raffles Education	89.21		Proposed scheme.
21/01/08	Consolidated Media Holdings	CMJ	Illyria/Consolidated Press JV	37.90		Proposed scheme acquisition.
29/02/08	Mark Sensing	MPI	Unidentified party	0.00		Merger talks proceeding.
22/01/08	Midwest Corporation	MIS	Sinosteel	11.10		Offer "too low".
05/12/07	Mirvac Group	MGR	Lend Lease Corp	0.00		Talks confirmed.
31/01/08	Mount Gibson Iron	MGX	Shougang Concord	20.22		Mount Gibson "unaware" of offer reported by news media.
31/01/08	Warehouse Group	WHS	Woolworths	0.00		NZ High Court grants Commerce Commission leave to appeal clearance order.
31/01/08	Warehouse Group	WHS	Foodstuffs Co-operatives	0.00		NZ High Court grants Commerce Commission leave to appeal clearance order.

Source: NewsBites